Equities big winner of FY14, gold loses sheen
Mar 31 2014 , New Delhi
Gold had a disastrous year among popular asset classes, ending with negative returns for the first time in eight years.
The tapering of quantitative easing by the US Federal Reserve and India’s curbs on gold imports took away much of the shine from the yellow metal, while improving economic indicators prompted investors to desert the ‘safe haven’ of bullion to flock to equities.
Sensex notched up 18.85 per cent gain from the end of FY13 to the end of FY14. This was the highest year-on-year return on Sensex after a record 80.54 per cent gain in FY10, and more than double the 8.23 per cent gain it had seen in FY09.
In line with direct equity, 96 largecap and multicap open-ended equity diversified mutual fund schemes with a track record of at least five years generated an average return of 20.06 per cent on a year-on-year (YoY) basis, following tepid performance in the three previous years.
FY14 marked many highs and lows for both equities and commodities, as weak emerging market currencies, high fiscal deficit and a cut in US’ bond buying programme led to a shift in focus from one asset class to the other.
A drop in inflation and current account deficit in India, however, sparked heavy inflows into equities, which not only helped the equity benchmarks hit new highs, but improved the performance of mutual fund schemes as well.
“We expect equities to outperform in FY15 too, not only in India but globally. The stock market generally discounts future growth, and if the US Fed starts raising policy rates in FY16, its impact would be seen on gold price in FY15 due to its inverse relationship with interest rate,” said DK Aggarwal, CMD at SMC Investments and Advisors.
The MCX spot gold closed FY14 with a 2.74 per cent YoY decline in price, on the back of 4.18 per cent return for FY13, 35.23 per cent for FY12 and 27.36 per cent for FY11. It was the first yearly loss for the yellow metal since MCX started disseminating spot gold data in October 2005, Bloomberg data showed.
Among other commodities agrocommodities, as represented by NCDEX benchmark Dhaanya, clocked 10.42 per cent gain for FY14 after flat growth in the preceding year. Dhaanya represents 10 agro-commodities, including castor seed, chana, soyabean and turmeric.
The base metal pack as represented by the LME metal index continued to remain under pressure in FY14, amid talks of slowdown in the largest metal consumer, China.
The LME metal index that tracks six base metals — including aluminium,
zinc and copper — declined 8.24 per cent in FY14 after witnessing a similar decline in the preceding year.
SMC Investments’ Aggarwal is bearish on agrocommodities but expects that a drop in interest rates would boost fixed income products.
Fixed income assets, represented by the 10-year government bond yield, saw gains swing between 7.11 per cent and 9.24 per cent through FY14, but quoted at 8.80 per cent on Monday. The bond yield stood at 7.96 per cent at the end of previous financial year.
Forty-two long-term debt fund schemes lagged bond yields, offering an average return of just 5.18 per cent for FY14 compared with 10.22 per cent gain in FY13.
Phani Shekar, a fund manager for portfolio management services at Angel Broking, said investors should scale their risk appetite carefully before building a portfolio, as terms like ‘fair’ and ‘safe’ returns can have different meaning for different investors.
“If you are a low risk-taker, you can invest 70 per cent of your corpus in fixed income products and the rest in equities. An extremely high risk-taking investor can invest up to 100 per cent in equities. We see gold as a hedge against volatility in various asset classes. A small investment in gold is always advisable,” Shekar said.
“We believe a moderate risk-taking investor should invest 40 per cent in equities, 40 per cent in fixed income products, 10 per cent in commodities and keep the remaining 10 per cent liquid for FY15. A high risk-taker may invest 60 per cent in equities and 40 per cent in fixed income products,” said SMC’s Aggarwal.